Since July 2015, when the Department of Labor (DOL) issued proposed regulations under the Fair Labor Standards Act (FLSA) that significantly changed how to determine if an employee is eligible for overtime, employers have been anxiously awaiting the final rules. That wait is over! On May 18, 2016, the DOL issued the long-awaited final regulations updating the overtime pay rules.
The final regulations are primarily focused on updating the salary thresholds needed to qualify as exempt employees, although certain other important changes were also included. The following is a list of some of the significant changes in the new rules:
- The standard salary level for an employee to be exempt will be increased to $913 per week ($47,476 annually), which is at the 40th percentile of earnings of full-time salaried workers in the lowest-wage census region (currently the South).
- The total annual compensation requirement for purposes of a highly compensated employee (HCE) will be increased to $134,004 annually, which is the equivalent of the 90th percentile of full-time salaried workers
- The annual salary requirements will be updated every three (3) years.
- Nondiscretionary bonuses, incentive pay and commissions can count toward up to 10% of the new minimum salary threshold for non-HCE employees, provided they are paid at least quarterly
- Finally, the increased salary level and raise in the HCE total compensation thresholds for exempt status go into effect on December 1, 2016.
Although the proposed rules sought comments on the adequacy of the current “duties tests,” the final regulations did not change any of the existing requirements. As a result, employers will continue to use the same duties test as part of the determination of whether an employee is entitled to overtime pay (however, fewer employees will be subject to this requirement as the salary test must be met first).
The DOL also provided a chart summarizing the major provisions under the current, proposed and final versions of these regulations.
Implications for Employers and Options for Responding to New Salary/Compensation Levels
These rules will have major impact on most employers as they extend FLSA overtime protection to 4.2 million employees that weren’t previously covered (based on estimates from the DOL). Employers should begin considering which employees/jobs are affected and whether changing the exemption classification and/or pay is the desired approach going forward. Furthermore, employers should analyze current pay vis-à-vis expected overtime under the new rules and be careful when crafting communications about any changes brought about because of this rule to various stakeholders.
It is important to note that these are changes to federal law. Employers should also be mindful of how these new rules interplay with any state wage and hour laws, especially those that have traditionally been more strict than the federal requirements with respect to overtime eligibility (such as those in CA, NY and PA to name a few).
Additional details and analysis of the final rules will be distributed in the coming days.
This information is not intended to represent legal or tax advice and has been prepared solely for informational purposes. You may wish to consult your attorney or tax adviser regarding issues raised in this publication.